20 years of Mutual Funds: Promise unfulfilled

Mastergain 1992, an open-ended scheme seeking to provide long-term appreciation through investment in equity or equity-related instruments, was launched by the Unit Trust of India (UTI) just a year before India opened up mutual funds to private sector players. Mastergain was recognised by the Guinness Book of World Records for attracting 5.7 million folios (one person's holding in one scheme). Twenty years later, the total number of equity folios of India's mutual funds industry, which comprises 45 players and around 3,000 schemes, is roughly 33 million. That's just under six times the folios of just one scheme of UTI. The UTI story thereafter took a different turn, but this in a way sums up the state of the mutual funds industry today. Twenty years should be an important milestone, but there are enough reasons why the mutual funds industry is not in a celebratory mood. When the country's first private sector mutual fund was born in July 1993, everyone who mattered sang paeans to the significant reforms that would contribute to wealth generation of India's retail investors. That promise lies unfulfilled.

In fact, the retail investor's contribution as a percentage of assets under management (AUM) has been going down. In 2011, it was 28 per cent, which came down to 27 per cent in 2012 and 23 per cent so far in 2013. Sebi Chairman U K Sinha's outburst on Wednesday against "non-serious" players in the industry is, therefore, not surprising. Consider the figures: the top 10 players from India's 45 asset management companies control 77 per cent of the AUM, and the bottom 10 just one per cent of the business. Equity mutual funds held 7.67 per cent of the entire Bombay Stock Exchange's (BSE's) market cap in June 1993. The figure has shrunk to 2.93 per cent in 2013. There's more. The total number of mutual funds branches in the cities beyond the top 15 is just 52, while the total number of branches is 1,600. No wonder the top five cities still account for 74 per cent of the total AUM. These are numbers that call for serious introspection on the part of the industry, since enough incentives have been given to prompt them to move beyond the big cities.

The industry defends itself by quoting a different set of numbers. The Rs 8.2-lakh crore (as on March 2013) industry has risen at a compounded annual growth rate (CAGR) of 21 per cent in terms of assets in the past 20 years since the opening up of the industry. But the point to note is that the growth in equity assets, which account for almost 80 per cent of investors, is just 14 per cent as the BSE Sensex's market cap during the same period has risen by 19 per cent. Comparative numbers of some of the emerging countries also show the industry in poor light. According to data from global agency Investment Company Institute, the Indian mutual funds industry's CAGR in AUM has been just 1.07 per cent (in dollar terms) in the past five years, which is the second lowest after China (0.16 per cent, though that country has significantly higher AUM). South Africa's was 8.80 per cent and Brazil's 11.72 per cent.

There is, however, some merit in the industry players' argument that the regulator has played a role in the failure of mutual funds to take off. For example, while the Indian regulator banned entry load with immediate effect in 2009, the UK's Financial Services Authority gave the industry three years to adjust to the new regime. There are many such examples of the regulator's over-zealousness. In hindsight, former Sebi chairman M Damodaran's comment in the heady days of 2007 should have been taken seriously by both the industry and the regulator.

Mr Damodaran had said that the mutual funds industry seemed to be prematurely patting itself on the back and the question of who had made what sort of growth provoked more questions than it provided answers. Famous last words?